Insuring dairy

Gary Kregel welcomes new
ideas that work on his northeast Iowa dairy farm. Just out of college, he was
among the first to use embryo transplants in his 240-cow herd. Today, he’s also
among very few dairy farmers to try insuring livestock gross margins on milk.
It was first offered in late 2008 by USDA’s Risk Management Agency (RMA) and is
sold by some crop insurance companies.

“This is essentially a way
of buying a put on milk and buying a call on feed, and the premiums will be
less than buying either one of these on the board,” Kregel says. RMA self
insures, but the margins of milk price over feed costs that can be covered are
derived from CME futures prices for Class III milk, corn, and soybean meal on
the last three trading days of the month. The margin is set on the last
business Friday, and coverage starts one month later, running for up to 10
months. You can insure as little as one month. For the months you insure, if
the average margin on the board drops below your insured level, you get a
payment. “I like the idea of buying the spread instead of actually contracting
the milk,” Kregel says.

Pitfalls, Fixes

Kregel didn’t jump in right
away, though.

“The premiums were quite
high for the margins I could get,” he says. “Once we could get double-digit
margins for about 50¢ (per cwt), we bought some.”

In early 2010, he locked in
a $12/cwt gross margin for the months of March, April, and May. The premium was
about 40¢/cwt. Prices fell enough to pay 80¢/cwt, so the farm netted 40¢/cwt.
He insured only about 60% of the milk produced. Concerned about rising feed
costs, he bought more coverage again before harvest.

The cost of premiums is just
one of several reasons Dairy Gross Margin insurance hasn’t taken off. Unlike
crop insurance, premiums were paid up front and there wasn’t any subsidy.
Starting December 17, RMA is making improvements.

Premiums can be paid at
the end of the coverage period.

RMA will subsidize
premiums for coverage of more than one month, starting at 18% if you don’t
choose a deductible. When Dairy Gross Margin insurance started, you could lower
premium costs by insuring up to $1.50 less of the available margin. Now the
maximum deductible has been increased from $1.50 to $2. Premium subsidies go up
along with the size of the deductible, up to 50% for policies with $1.10 or
higher deductible. Subsidies apply if you cover more than one month.

The amount of feed you can
insure was updated. It now ranges from 0.13 bushels to 1.36 bushels of corn per
cwt of milk and 1.61 pounds to 26 pounds of soybean meal per cwt.